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In Modern Economics, The Public Debt Creation is Perfectly Justified in the Following Situations

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In modern economics, the public debt creation is perfectly justified in the following situations:

1. During War Period:

Modern war is very costly and cannot be entirely financed through taxation measures. For, if taxes alone are used, production will be adversely affected under heavy direct taxes and fixed income groups will be hit hard when indirect taxes are enhanced.

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Public borrowings will not have such desired consequences. Creation of public debt is, thus, a better and easier method of collecting revenue and transferring resources from the civilian to the military sector.

2. In Times of Depression:

Public debt creation is considered very significant to overcome a depression. For, during a depression, increase in taxes will have an adverse effect on incentive to work and invest.

But, if the government takes up public investments, financed by borrowing, especially from the banking sector, employment, income and level of effective demand will have a cumulative expansion. Moreover, during a depression, loanable fund is in excess supply, which can be fruitfully exploited through government borrowings which would also help in sustaining the capital markets.

3. To Meet Unprecedented Expenses:

A government may have to borrow for financing a sudden rise in its expenditure required to meet certain fortuitous events like floods, famines, epidemics etc. necessitating relief works.

4. To curb Inflation:

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Public borrowing may be regarded as a means to relieve the pressure of inflationary spiral in the economy, as by raising public loans the government absorbs the excessive spending power from the subscribers.

But, as many modern economists rightly feel, taxation would be a better anti-inflationary measure as compared to public debts, because in public borrowing, the liabilities of the government increase if the government does not use the borrowed sums. But the surplus of tax revenues can very well be left idle in the State treasury to curb inflationary pressure in the economy.

5. Development Finance:

Mostly, the developing countries in view of the low taxable capacity of the economy and less domestic resources available for development purposes resort to internal and external borrowings as an important source of development finance.

For effecting rapid capital formation and accelerating the tempo of industrialisation, India, for instance, has resorted to public loans to a greater extent in recent years. Under economic planning, public borrowing, thus, constitutes an important financial resource.

In advanced countries, too, the governments resort to borrowings for constructing capital equipment and public works programmes such as development of roads, irrigation, power houses, etc. In this way, public loans are being productively used.